India Research Sector: Information Technology

Management Meeting Update

Date CMP Target Price 52 week High / Low Equity Face Value Mkt. Capitalization Avg. Daily Vol. (12 M) BSE SENSEX NSE NIFTY NSE Code Bloomberg Code BSE Code 13th March, 2013 `1560.00 N.A. `1598.00 / 1046.55 `195.72cr `1.00 `3,05,300cr 1,55,000 19564.92 5914.10 TCS TCS IN 532540

Tata Consultancy Services Ltd.

Hold

We recently met the management of TCS to understand the current demand scenario in the Indian IT industry and strategy of TCS to remain at leadership position by maintaining industry leading growth and margin performance. Based on our overall discussion, we believe, TCS would continue to grow better than its peers backed by its strong execution capability and ramp up of earlier deal winnings. At the current price of `1560, the stock is trading at 20x of FY14E EPS of `78.15 and we are reiterating our HOLD recommendation on the stock. Traditional IT Services Still Has Steam Left Despite immense growth over the last 15 years, Indian IT services industry still covers a very small part of the overall global IT services spending. Even if we consider the fact that incremental offshoring reduces the overall IT budget; still we have companies (even in BFSI space) in USA who are under penetrated in terms of offshoring. Although, the portion of IT services that can be offshored is a matter of debate, but, Indian IT companies have been entering into various new service lines over the past few years where incremental outsourcing and offshoring can be an opportunity. Further, these companies have been targeting newer industry segments over the past few yearswhile financial services and insurance were the initial sectors that these companies penetrated, they have been focusing on verticals such as manufacturing, retail, healthcare, and energy & utility of late.
(` cr)

Shareholding Pattern @ 31-12-12 Promoters DI/MFs Foreign Institutions Public & Others 73.96% 6.45% 14.96% 4.63%

Europe May Offer Huge Growth Opportunity Indian IT companies have been able to grow reasonably fast in the Europe region over the past, mainly focused towards United Kingdom market. Very recently, companies are able to penetrate and grow the continental Europe market and NORDIC region due to their lower penetration and relatively low prevalence of offshoring adopted by European companies. Although, the macroeconomic environment in Europe is still shaky, we believe, Europe may offer huge growth opportunity towards the Indian IT services companies. Pent Up Demand in Discretionary Spending May Come in CY14 CY12 was a dreadful year for IT services industry, especially in the discretionary spending area and companies in the developed market are postponing the incremental spending due to overall instability into the system. But, with some sign of development in the macroeconomic front, clients have started spending to bring overall efficiency into the system. We believe, although CY13 IT budget will be flat to marginally positive, spending would be more tilted towards CTB spending and that would give boost to the discretionary decision dependent service lines. TCS Management Maintains Bullish Stance TCS management indicated that FY14 would be a better year for TCS as well as Indian IT as the company has better clarity on the clients spending intention; decision delays are getting over and annuity deals are coming back to the market. Big data, Digital Spending, Analytics are also picking up momentum. Europe (especially Continental Europe) is expected to perform better in the coming years, as clients are more moving towards the offshoring model to curtail the cost. Management also indicated early signs of improvement in discretionary spend as companies worldwide are targeting more efficiency to get better growth and higher margin.

Y/E Mar Net Sales ($ Mn) Net Sales Op. Profit PAT EPS Op. Margin PAT Margin

FY11 A 8186 37325 11177 9067 46 30% 24%

FY12 A 10171 48894 14435 10413 53 30% 21%

FY13 E 11598 63304 18287 13873 71 29% 22%

FY14 E 13233 71456 20502 15296 78 29% 21%

*E Estimated, A Audited

Debashish Mazumdar Tel: +9122-66638952 debashish.mazumdar@tssl.in

Strong Deal Pipeline Across Sectors TCS won 7 large deals during Q3FY13 and among them 2 are in BFSI and1 each in Telecom, Transportation, Retail, Healthcare and Government. Again, among the 7 large deals company won 4 deals in USA. Management also articulated strong confidence on the overall deal pipeline in the near future. Again, the ramp up of the recently won deals would aid growth in the coming quarters. We believe, TCS has very strong order book position and that give enough visibility and assurance about the near to medium term growth prospect. Baking & Financial Services- Still Have Low Hanging Fruits To Grab Banking and Financial Services is expected to continue to be the largest IT services spender in the near future as their dependence on IT spending would continue to be high and they would be the primary adopter of the new technology. There are banks and financial services institutions in the global levels who have opportunity to increase offshoring and outsourcing spending in the near future. While, BFS space in Europe, which has a large size of around $90bn is incrementally opening up for outsourcing. Insurance Sector Growing Rapidly; Diligenta Has Good Potential Insurance sector, which contributes 12% - 13% of total revenue of TCS is growing rapidly mainly backed by replacement of the old systems that companies are holding in this space. According to management, Diligenta still has good untapped potential in the UK market. Around the total 75mn closed insurance books, 25mn closed books are catered by different players and 8mn is under TCS. Diligenta has good potential tapping incremental market share in the closed book space due to its unique platform sharing low cost model. Strong Hiring Indicates Near Term demand Scenario TCS hired around 50000 people in the first 9 months of FY13 including 24000 fresher and the company would be completing the full year fresher hiring target without any deferment. Even for FY14, management targeted 25000 campus hiring and already given 24000 offers which shows managements immense confidence on the medium term growth prospect. Growth To Continue; Margin To Remain Stable TCS is expected to maintain its industry leading growth in near to medium term backed by its strong order pipeline and recent big deal wins. Based on the recent pick up in the large deal market and continuous growth momentum maintained by TCS, we are revising our FY14E revenue expectation upward to $13233mn, which implies 14% growth YoY. Overall operating margin is expected to remain stable and EPS estimates revised upward to `78.15 to accommodate, higher USD-INR and lower taxation.

Recommending HOLD
We believe, TCS would continue to grow better than its peers backed by its strong execution capability and ramp up of earlier deal winnings. But, at the current price of `1540, the stock is trading at 20x of FY14E EPS of `78.15 and there is little room available for upside. At the current price we are reiterating our HOLD recommendation on the stock.

TCS Ltd. Management Meeting Update

13th March 2013

Financial Projections
(` Cr)

Income Statement Revenues ($ MN) Revenues Software Development Cost Gross Profit S,G&A Expenses S, G & A Expenses Total S,G&A Expenses EBITDA Depreciation & Amortization PBIT Interest (Incl. Forex Gain & Loss) Other Income PBT Tax PAT Before Minority Less: Minority Interest PAT Before Extraordinary PAT After Extraordinary EPS (`) Operating Margin PAT Margin Balance Sheet Share Capital Reserve & Surplus Minority Interest Less: Misc Exp Written Off Total Networth Secured Borrowings Unsecured Borrowings Total Borrowings Deferred Tax Liability (Net) Total Liabilities Gross Block Less: Accumulated Depreciation Net Block Add: Capital WIP Total Fixed Assets Marketable Investments Non Marketable Investments Total Investments Inventories Sundry Debtors Cash & Bank Balance Other Current Assets Loans & Advances Total Current Assets, Loans & Advances Less: Current Liabilities Net Current Assets Total Assets

FY10 6339 30029 10880 19149 10455 10455 8695 661 8034 207 463 8290 1197 7093 92 7001 7001 35.77 28.95% 23.31% FY10 296 18171 362 3216 15612 31 72 103 -99 15617 6420 2897 3522 1017 4539 3682 0 3682 18 5855 4719 26 3970 14588 8295 6293 15617

FY11 8186 37325 13726 23598 12421 12421 11177 735 10442 63 640 11020 1831 9189 122 9067 9067 46.33 29.95% 24.29% FY11 296 24209 458 3232 21731 38 36 75 -51 21755 7792 3545 4247 1469 5716 1764 0 1764 23 8199 7378 74 4858 20532 7554 12978 21755

FY12 10171 48894 18572 30322 15887 15887 14435 918 13517 448 854 13923 3400 10523 110 10413 10413 53.21 29.52% 21.30% FY12E 296 29284 559 3543 26595 116 0 116 -83 26628 9448 4329 5119 1446 6565 1352 0 1352 18 11520 6003 458 2255 20255 10884 9370 26628

FY13E 11598 63304 24183 39121 20834 20834 18287 1070 17217 38 986 18165 4127 14038 165 13873 13873 70.85 28.89% 21.91% FY13E 296 37862 458 3232 35384 116 0 116 0 35500 10848 5342 5506 1446 6952 3352 0 3352 18 13770 9495 7273 3255 33811 11484 22327 35500

FY14E 13233 71456 27373 44082 23580 23580 20502 1075 19427 30 726 20123 4628 15495 199 15296 15296 78.15 28.69% 21.41%
(` Cr)

FY14E 296 51795 458 3232 49317 116 0 116 0 49433 10848 6417 4431 1446 5877 3352 1 3353 18 13770 24503 7273 3255 48819 11484 37335 49433

TCS Ltd. Management Meeting Update

13th March 2013

Team
Analyst Nilesh Doshi Abhilasha Satale Debashish Mazumdar Shivani Mehra Jigisha Jaini Nisha Harchekar Ashwini Manwatkar Designation President (Research) Senior Manager Sr. Research Analyst Sr. Research Analyst Sr. Research Analyst Sr. Research Analyst Research Associate Metals & Mining, Textiles Information Technology, Media Auto, FMCG Capital Goods, Engineering Chemicals Auto, FMCG Sector Email nilesh.doshi@tssl.in abhilasha.satale@tssl.in debashish.mazumdar@tssl.in shivani.mehra@tssl.in jigishajaini@way2wealth.com nishaharchekar@way2wealth.com ashwinimanwatkar@way2wealth.com Telephone +9122-6633 8950 +9122-6663 8953 +9122-6663 8952 +9122-6663 8956 +9122-6146 2957 +9122-6146 2952 +9122-6146 2949

Institutional Sales Shilpa Venugopal Anjali Dave

Designation Senior Manager Sales Associate

Email shilpavenugopal@way2wealth.com anjali.dave@tssl.in

Telephone +9122-6164 2969 +9122-6663 8954

Institutional Dealing Ajay Prabhudesai Vipul Mehta Gaurav Shah Mitul Doshi

Designation Assistant Vice President Manager Manager Senior Executive

Email ajay.prabhudesai@tssl.in vipul.mehta@tssl.in gaurav.shah@tssl.in mitul.doshi@tssl.in

Telephone +9122-4027 8930 +9122-4027 8931 +9122-4027 8933 +9122-4027 8932

Corporate Office: 3rd Floor, Hincon House, Tower - B, 247 Park, L.B.S. Marg,Vikhroli (W), Mumbai, Maharashtra 400083, India. Tel No. 91-22 6663 8900 Email: research@tssl.in website: www.technoworld.in, www.way2wealth.com

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TCS Ltd. Management Meeting Update

13th March 2013